More choice equals more freedom, therefore “Good!” seems like the self-evident answer. As with all other self-evident answers, this one is wrong. That wrong result has significant impacts on financial advisers and on their clients. Reality is that the more choices you have the more dissatisfied you will be, and the more dissatisfied you are the more changes you will make, and the more changes you make the poorer will be your outcome. And you will make the changes even when the outcomes are good enough, even very good.
Consider my friend Eugene. He is a super-organized master of detail. Many years ago, in July of that year, he paid off the mortgage on his home and as the result had money to invest each month. His investment vehicle of choice was a Registered Retirement Savings Plan, (RRSP) which would give him both savings and a tax advantage. But which one?
Being super organized, he prepared a spreadsheet. (Actually a lot of large paper sheets taped together on the dining-room table with inked columns and rows.) Each column was a possible RRSP plan and each row was a characteristic of that plan. The detail in each box he derived from an almost infinite number of brochures that he acquired from every bank, trust company, credit union, insurance company, stock broker and fraternal organization that he could find.
It was to be a supremely rational decision, but choices impaired rather than helped.
As the end of February deadline approached, he became more frustrated. According to his wife, at one point there were 174 plans in the matrix. What should he do? What did he do?
He made an excellent choice. He took the money he had set aside and they went to Hawaii for two weeks.
Why was that a good choice? Because it did not deal with the RRSP decision.
By having many choices, he guaranteed eventual dissatisfaction. No matter how good his first choice might have been he would have found in a year or two that there was a better one he should have made. Dissatisfaction leads to weak decisions in future. By choosing Hawaii he avoided the choice/dissatisfaction problem.
Eventually he accepted “good enough to get what I want” as a reasonable option.
For advisers, offering many options seems like a good idea. It makes you look impartial. Pick what you like, I can do it. But it does not work. You are the expert, the client is the one who knows the least technically so why should they make the decision.
If a doctor treating you for serious disease #7 said, “There are four choices for treatment. Here are the risks and probable outcomes for each, which do you want?” you would be appalled. You would likely say, “Which do you think is best?” or, “If you were me, which would you choose?” You would not be accepting of, “But I am not you and you need to decide.”
Marketing folks believe that clients value choice, it is a part of their differentiation approach. The evidence, from author and professor Barry Schwartz, is that while clients value choices, they don’t want to make them and when they pick from many they tend to be more dissatisfied with the outcome. That makes for poorer client relations.
When there are fewer choices, people expect less. There is room for a pleasant surprise. Today, with all the choices, people expect too much and are dissatisfied when it does not appear.
How do you manage expectations and performance successfully when perfect is the minimum?
Make recommendations. Accept some responsibility. Do not try to dump the decision risk to the unknowing client. If you are concerned about the liability find another client. One who gets it.
No matter the choice someone makes, it will never be the best one. It does not need to be the best. It merely needs to be good enough to reach the goal.
Decide that “good enough” easily implemented and easily monitored for management and easily monitored for connection to your plan is what gives you freedom.
More choice increases risk because it expands the reasons for dissatisfaction. (With a lot of choice there is an implicit opportunity cost.) When dissatisfied, you change something. Change hurts outcomes because change costs and so you cannot afford to do it very often. By having more choices, your risk of loss increases even if all the choices are good ones.
When you think about it, how badly served would you be if you put all your money into a balanced portfolio with a manager who had a decent record. They study the market and select investments. They reallocate to keep the predetermined ratios. You do little other than check to see if they are still investing as you expected them to do and supply the capital.
I have never checked to see if an average, or a little above, balanced fund is the answer but my instinct is that over a long time, I would be ahead both money and satisfaction.
The best satisfier is getting what you want.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.